I presume you have done the 'dd' OK and this method works as I have no experience of that. I personally use grldr from grub4DOS to boot my (Poor Man's install) Knoppix.

The missing hal.dll message is very misleading as hal.dll is usually still there - as you have found because Windows boots OK.

This error usually occurs when Windows cannot find the file referenced in boot.ini, in your case:
bootsect.lnx

Check very carefully the spelling of your file (including small or capital letters) is the same on the disk and in the boot.ini. Make sure that in .lnx the letter 'l' is used and not 1.

Any menu.lst associated with the grub boot should also be located in the c:\ directory.